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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.

Microsoft likely to post strongest quarter in years driven by Azure (cloud) business

Diversification plans key for online advertising-dependent Alphabet

Online retailer Amazon is expected to report strong earnings based on growth

in its cloud infrastructure business. Image: Shutterstock

By Peter Garnry

Next week is the busiest week in the first-quarter earnings season, with 567 out of around 2,000 companies in our global equity universe due to report results. Three titans of the US technology sector, Amazon, Microsoft and Alphabet (Google), all report earnings on Thursday, and they are also the focus of today's Earnings Watch.

Status on Q1 earnings season

So far 85 companies in the S&P 500 have reported first-quarter earnings, with the current positive surprise ratio standing at 81% on EPS and 72% on revenue. In addition, year-on-year growth rates on EBITDA and revenue are also solidly back into positive territory, with EBITDA growth y/y at around 6% as higher commodity prices are helping energy and materials sector businesses to rebound.

In general, we expect a robust earnings season and hope to see European earnings gaining more momentum compared with fourth-quarter figures.

Amazon to report strong Q1 growth

Amazon, the world's most dominant force in e-commerce and cloud infrastructure, is set to report Q1 earnings on Thursday after the market close. Analysts expect EPS of $2.28, up 27% y/y driven by strong growth in its cloud infrastructure segment (AWS). Revenue is estimated to be $35.3 billion, up 21% y/y. Amazon's continued strong growth excites investors who have sent the share price up 20% year-to-date close to new all-time-highs.

Amazon weekly share price

Source: Saxo Bank

Amazon's product revenue growth has slipped in the past two quarters in a sign that e-commerce competition is likely intensifying in many key markets. This is also likely the explanation for Amazon's big push into automated grocery stores and clothing.

Despite falling revenue growth in its core business, the high growth rate in Amazon's AWS segment is helping group-level growth overall. Even more importantly the main growth in EBITDA is coming from the AWS segment.

Source: Bloomberg

And the AWS segment is key to Amazon's overall strategy. Amazon runs its entire business on the AWS platform to reduce operating costs and complexity. AWS is also a high growth segment with strong operating margins, which has allowed Amazon to increase free cash flow to around $10-12 billion in 2016-17 from around $2 billion annually in 2011-14.

This extra financial power allows Amazon to expand more aggressively in its e-commerce business and move into grocery stores, helping the company secure its dominant position. As the graph below shows, Amazon gets five times as much revenue from its cloud business as Microsoft, which is the industry's number two player.

Source: Quartz

Our quant model on global equities now rates Amazon's stock around average, so it's basically seeing better opportunities in US equities. Even so we are expecting strong Q1 earnings.

Cloud-based growth to secure strong Microsoft quarter

The world's largest enterprise software-maker Microsoft will report Q3 earnings on Thursday, with analysts expecting EPS of $0.70, up 13% y/y and revenue at $23.6 billion, up 7% y/y.

Expectations are high as Microsoft has successfully navigated in the new software industry, transforming itself from on-premise software to cloud-based business. We expect the strongest quarterly result in many years, driven by strong growth in Microsoft's Azure (cloud) business. Investors will also focus on the recent LinkedIn acquisition, which is expected to add almost $1 billion in operating earnings to the group result.

Microsoft weekly share price

Source: Saxo Bank

Our quant model has a modest positive rating on Microsoft shares, driven by its high shareholder yield and above-industry return on invested capital.

Fines and diversification in focus at Alphabet

Alphabet, the parent company of Google, is expected to report Q1 earnings on Thursday after the market close, with analysts expecting EPS of $9.38, up 25%, as Google continues to take market share in online advertising.

Google has just settled an anti-trust cast in Russia, and the market expects the company to do the same in the European Union as the six-year long investigation draws to an end. The fine is expected to be a single-digit billions figure. The largest fine given by the EU commission for abuse of dominance was $1.2 billion against Intel, which was around 4% of revenue at the time. If we use the same yardstick on Google today, the fine could amount to around $5 billion.

Alphabet weekly share price

Source: Saxo Bank

Alphabet remains a concentrated bet online advertising, with Google's advertising still representing around 88% of total revenue, down from 91% in 2013. Diversification away from being almost solely dependent on Google is still a key focus for investors and so is the investment plan to increase diversification. Alphabet has been blamed for years for making excessively large other investments without any meaningful economic return.

Our quant model has a modest positive rating on Alphabet, based on its valuation being more attractive than the industry, but recent underperformance in the industry also supports the model's positive view.

Other earnings releases next week

Below are the 30 most important companies reporting earnings next week. If you want our full Earnings Watch publication, please contact your account manager.

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